LI WO HING v. RAIFFEISEN BANK INTERNATIONAL AG, BEIJING BRANCH

HCSD 19/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 19 OF 2014

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D E C I S I O N

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Introduction

1.  This is the hearing of the Applicant’s summons dated 24 June 2014 seeking extension of time for applying to set aside a statutory demand served on him by the Respondent.  

2.  The Applicant was the chairman of Shanghai Chengtong Precision Strip Co Ltd (“Chengtong”).  Between 2007 and 2009, he executed letters of guarantee in respect of loan facilities granted by the Respondent to Chengtong and Shanghai Blessford Alloy Company Limited (“Blessford”).

3.  He also furnished the Respondent with undertakings on 25 March 2009 and 18 June 2010, the latter of which was co-signed with his daughter.  He and his daughter undertook they would remain the direct or indirect majority shareholders holding at least 33.4% of the shares in China Precision Steel Inc during the tenor of the loan facilities.

4.  On 2 May 2014, the Respondent issued a statutory demand against the Applicant for repayment of the outstanding principal sums of RMB 123,000,000 and RMB 50,261,640 with interest due under the loan facilities in the sums of RMB 21,187,708.54 and 8,716,198.11 respectively.  At the hearing, Mr Nip, counsel for the Respondent, admitted that the above sums had not taken into account a payment of RMB 1,500,000 made in August 2012.

5.  Having failed to effect personal service on the Applicant at his usual or last known address in Hong Kong on 2 May 2014, the Respondent’s solicitors, Messrs Stephenson Harwood (“SH”), sent an appointment letter by ordinary post to the Applicant enclosing a copy of the statutory demand on 5 May 2014.  The appointment letter was not returned to SH.  However, SH’s process server was unable to effect personal service of the statutory demand on the Applicant at the appointed time, ie at 8 pm on 14 May 2014.

6.  On 19 May 2014, SH’s process server attended the Applicant’s address to deliver a letter addressed to the Applicant warning him of the publication of a Chinese notice of the statutory demand in Hong Kong Commercial Daily on 20 May 2014.  Later that afternoon, a Mr Leung who identified himself as the Applicant’s secretary informed SH that he had collected the appointment letter and copy of the statutory demand and that the Applicant would return to Hong Kong on 23 May 2014.

7.  On 20 May 2014, SH effected service of the statutory demand by causing a Chinese notice of the statutory demand to be published in Hong Kong Commercial Daily.  That afternoon Mr Wang of Messrs Andrew Wang (“AW”), solicitor acting on behalf of the Applicant telephoned SH and confirmed that the Applicant had received the statutory demand enclosed in the letter of 19 May 2014.  In his affirmation, the Applicant admitted that he became aware of the statutory demand on 21 May 2014.  The time for the Applicant to apply to have the statutory demand set aside expired on 7 June 2014.

The applicable legal principles

8.  It is Mr Wang’s submission that this application raises two issues: (1) whether there was undue delay; and (2) whether there was merit in the application.  He said that the Applicant has merit and the merit will be shown in the Applicant’s affirmation to be filed.  However, he said, as he had set this application down for a three minute hearing, this is not the occasion for substantial argument on merits.  On his proposition, what was left to be determined was whether there was undue delay.  Mr Nip, counsel for the Respondent disagreed.  He argued that to obtain extension of time, an applicant has to show special circumstances and good cause; and the burden of proving these two issues is on the applicant. 

9.  I agree with Mr Nip’s submission.  Mr Wang’s argument was totally flawed.  Pursuant to rule 47 of the Bankruptcy Rules, a debtor may apply to court for an order setting aside a statutory demand within eighteen days from the date of the service on him of the statutory demand or from the date of the advertisement of the demand, if it was advertised.  Section 100(4) of the Bankruptcy Ordinance gives the court discretion to extend the time for doing any act under the Ordinance or rules upon such terms as the court thinks fit.  Specifically, rule 204 of the Bankruptcy Rules provides as follows:

“The court may, under special circumstances and for good cause shown, extend or abridge the time appointed by these rules or fixed by any order of the court for doing any act or taking any proceeding.”

10.  This rule is similar to rule 132 of the English Bankruptcy Rules 1915.  An applicant has to show, first, special circumstances and, second, good cause to obtain abridgement of times fixed by the rules.    Rule 132 of the Bankruptcy Rules 1915 was replaced by rule 389 of the Bankruptcy Rules 1952 in which the words “under special circumstances” were omitted.  In Re A Debtor (No. 36 of 1952), Ex parte The Debtor v J T Richardson, Rymer Brothers, Ltd and Another[1], which has often been quoted as authority for the proposition that the mistake of the debtor’s solicitors was not “good cause shown” within the meaning of the rule, the English court recognised “special circumstances” as distinct from “good cause”, but observed that in reality the two requirements were indistinguishable.  Harman J said[2]:

 “It cannot be without significance that r 389 of the Bankruptcy Rules, 1952, has omitted the words “under special circumstances”, so that an appellant may now have his time extended without proving special circumstances, provided that he can show that there was “good cause”.  It is a little difficult to think of a “good cause” which would not also operate as a “special circumstance”, but I am content to suppose – and I must suppose – that the two things are different, and, therefore, the question which we have here to decide is whether there is “good cause shown”. ”

11.  In that case, the court was concerned with the construction of rule 389 of the Bankruptcy Rules 1952, under which an applicant is only require to show good cause.  Under rule 132 of the English Bankruptcy Rules 1915, to which our rule 204 is identical, there are two requirements.  The applicant has to show both “special circumstances” and “good cause”.  Harman J accepted these were separate requirements under the 1915 rules.  There is no doubt that they were and are under our rule 204.  The word “and” in both rules has to be read conjunctively. Harman J found it a little difficult to distinguish between the two requirements.  But in my view, “special circumstances” refer to surrounding circumstances which may afford an excuse for the delay in complying with the time limit; while “good cause” relates to merits in respect of the proceedings for which extension of time for taking certain steps in the proceedings is sought. Once the time appointed by the rules has passed, an applicant has to show cause and an explanation for the delay.  In other words, if an applicant has no merit in his defence, a good excuse for the delay in complying with the time limit alone would not avail him.  On the other hand, even if an applicant can show merits, ie good cause, he still has to show special circumstances to explain his delay. If he is guilty of, for example, contumelious delay, he cannot expect the court will exercise the discretion in his favour.  Of course, the shorter the delay, the easier it would be for him to show special circumstances.  Subject to showing good cause, the court will be more ready to grant indulgence for short delays.  It appears that by the Bankruptcy Rules 1952, the United Kingdom dispensed with the requirement of showing special circumstances.  While Harman J thought “good cause” probably embraces “special circumstance”, whatever the meaning of those two phrases in the United Kingdom, in Hong Kong, an applicant has to discharge the burden of showing both special circumstances and good cause in order to obtain extension of time.

12.  The next area of dispute between Mr Wang and Mr Nip is whether the mistake of a party’s solicitor is a good cause.  Mr Nip relied on Re A Debtor (No. 36 of 1952) which is often quoted as authority for the proposition that mistake of a party’s solicitors is not a good cause.  That case was adopted in Hong Kong by Yuen J, as she then was, in Re Li Wai Man[3].  In that case, the petitioner obtained summary judgment against the debtor in an action.  A statutory demand and later a bankruptcy petition in respect of the judgment debt were issued.  The debtor applied to set aside the statutory demand and the petition.  The application was dismissed and the matter was set down for trial.  Subsequently the petitioner amended the petition.  Then, on the Friday preceding the hearing, the debtor filed a summons seeking leave to set aside the statutory demand out of time, contending for the first time that he had a genuine cross-claim against the petitioner which was equal to or exceeded the judgment debt.  That application was made seventeen months after the service of the statutory demand.  Mr Wang sought to distinguish Re Li Wai Man from the present case on the basis that that was a case in which the judgment debtor was applying for extension of time whereas in the present case the applicant is a guarantor.  He argued that the triable issue is different.  With respect, I disagree.  Re A Debtor (No. 36 of 1952) and Re Li Wai Man established the general principle that mistake of a party’s solicitors is not a good cause.  These cases were not decided on the basis of any particular triable issue nor was the debtor’s status as principal debtor or as guarantor relevant.  Perhaps, the real distinction between Re Li Wai Man and the present case is that the length of delay in that case was seventeen months and not seventeen days.  But that is immaterial.

Action taken by the Applicant since service

13.  The Applicant was in the People’s Republic of China on 21 May 2014 when the statutory demand first came to his knowledge.  He immediately sought referral to solicitors familiar with such matters and made travel arrangements to return to Hong Kong to consult AW. 

14.  He had a preliminary meeting with Mr Wang of AW on Thursday 22 May 2014 and obtained legal advice.  He was unable to provide executed copies of loan agreements and guarantees relating to the statutory demand to AW as he had never been provided with such documents by the Respondent.  As a result Mr Wang was not in a position to provide him with any detailed opinion as to how to deal with the statutory demand.  The Applicant then instructed AW to obtain a full set of documents from SH.  Two days later, the Applicant took another trip to the United States under prior arrangements and remained there for about 16 days.

15.  In the meantime, AW waited until Tuesday 27 May 2014 and Thursday 29 May 2014 to send email requests to SH for the documents. However, these emails were lost in the transmission and dumped into SH’s junk mail folder.  On 30 May 2014, SH wrote to AW explaining that they do not accept notices and requests by emails but promised to provide copies of the documents upon AW’s confirmation by letter or fax to pay their photocopying charges.  Then upon receipt of AW’s confirmation by facsimile letter on 4 June 2014, SH provided AW with copies of three sets of guarantees on the same afternoon.

16.  AW promptly responded on the same day advancing five grounds for setting aside the statutory demand and demanded SH to withdraw the statutory demand.      By a second letter of the same date, AW requested for copies of 13 sets of the loan agreements to be provided by the end of that day as they had instructions to apply to set aside the statutory demand.  These copies were supplied to AW two days later on 6 June 2014.

17.  On 10 June 2014, AW sought SH’s consent for an extension of time of eighteen days for filing application to have the statutory demand set aside.  SH declined.  On 24 June 2014, AW filed the Summons applying for a further extension of eighteen days.  The application was set down for hearing on 10 July 2014.

Special circumstances

18.  Mr Wang started on the wrong premise by arguing that the test for granting extension of time is whether there is undue delay and merit.  As I have indicated, that is not the test and the burden is on the applicant to show special circumstances and good cause.

19.  The statutory demand was served on the Applicant on 20 May 2014.  At the time, he was in the PRC.  He received notice of the statutory demand on 21 May 2014.  He returned to Hong Kong and consulted his solicitor on 22 May 2014.  He left for the United States on 24 May 2014 and probably returned to Hong Kong on 9 June 2014.  The time for filing application to set aside the statutory demand pursuant to rule 47 expired on 7 June 2014.  On 10 June 2014, AW requested SH for extension of time.  That was refused by SH.  On 24 June 2014, AW made the present application.  The Applicant was late by seventeen days when he formally applied to court, or by only three days when he attempted to seek consent from the Respondent.  The delay could not be described as excessive or undue.  But that is not the issue.  The issue is whether there were any special circumstances explaining for the delay?      

20.  The only explanation offered by the Applicant for the delay is that he did not have copies of the guarantees and loan agreements; that he was out of Hong Kong on a pre-arranged business trip; and could not give instructions to his solicitors.  Given the modern development in telecommunication technology, this can hardly be a good reason.  The Applicant can effectively communicate with his solicitors by email, telephone, fax and other means.  As for the difference in time zone, this is something which he must resolve.  But, without too readily dismissing this explanation, I shall look into the facts to see if there is really no case for special circumstances.

21.  The Applicant consulted AW on 22 May 2014 and left Hong Kong on 24 May 2014.  During his absence, AW wrote to SH on 4 June 2014 advancing the following five grounds for setting aside the statutory demand:

(1)   the guarantees were signed under pressure;

(2)   the Applicant does not know English and the contents of the guarantees had not been explained to him;

(3)   the Applicant had not been informed of his rights to seek independent legal advice regarding the guarantees;

(4)   the guarantees signed on or about August were undated; and

(5)   the Applicant was not provided with any executed copies of the guarantees.

AW demanded SH to withdraw the statutory demand saying:

“Unless you withdraw the Statutory Demand by 6 June 2014, an application shall be made to the Court of First Instance to set aside the said Statutory Demand with an order for costs.”

22.  Except for the fourth ground that the guarantees were undated, there is no need for the Applicant to have in his physical possession copies of the guarantees or loan agreements to assert those grounds. Those grounds are all very factual.  If those were the grounds, it is inconceivable why he could not have instructed AW to apply to set aside the statutory demand on those grounds on 22 May 2014.  He need not have waited until 4 June 2014 to be advised by AW that he had those grounds.  Put ironically, for example, he need not have waited until 4 June 2014 to be advised by AW that he did not know English and that the contents of the guarantees had not been explained to him.  From the tone of AW’s demand, it appears that AW had firm instructions about those grounds from the Applicant.  The Applicant must have given those instructions to AW during the consultation on 22 May 2014 or by other means while he was out of Hong Kong.

23.  It might be argued that the Applicant could not have signed the affirmation in support of the application as he was out of Hong Kong.  If he had instructed AW of those grounds on 22 May 2014, there was nothing to prevent him from making the affirmation before his departure on 24 May 2014.  Given his travel commitment, he and his solicitors have to work on a tight schedule.  If the Applicant only gave those instructions while he was out of Hong Kong, he was only to blame for those are very factual assertions which he could and should have given before he left.  There was no reason why he did not inform AW on 22 May 2014, bearing in mind his imminent departure.  Even if those instructions were given while he was out of Hong Kong, AW could have prepared a draft affirmation on behalf of the Applicant and exhibited it in an affirmation to be filed Mr Wang explaining why the Applicant was unable to sign the draft affirmation and affirming that those were his instructions from the Applicant.  This is a common practice.

24.  Thus, whether the Applicant instructed AW about his grounds on 22 May 2014 or at any time between then and 4 June 2014, there is no reason why AW could not have made the application to set aside within the prescribed time limit.  I note that the delay was short.  It was only seventeen days.  But AW has utterly failed to show any special circumstances.

Good cause

25.  Mr Wang submitted that the Applicant has good cause which he will set out in an affirmation to be filed.  He explained that as this hearing was only a call over hearing and not the occasion for determining merits the Applicant was not obliged to file any affirmation stating his grounds for setting aside the statutory demand.  He further said there was not enough time for him to prepare a proper affirmation.

26.  The Applicant was the applicant and the party to start the ball rolling, so to say.  It is his obligation to comply with the rules by filing the application together with supporting affirmation setting out the grounds for setting aside the statutory demand.  However, Mr Wang seemed to have assumed that as this was not the substantive hearing of the application to set aside the statutory demand, but just an application for time, it is not necessary to set out the grounds at this stage.  In his affirmation in support, the Applicant said:

“My Solicitors have advised me and I verily believe that there are valid grounds which I will rely on for the application to set aside the SD. The grounds on which I claim to be entitled to the order to set aside the SD are set out in the Affirmation of the Applicant to be filed.”

It is plainly not enough for the Applicant to state in the supporting affirmation that the grounds will be set out in another affirmation to be filed.  Without setting out his grounds, there could be no basis on which the court may exercise its discretion to grant extension of time.  I cannot act on the basis of the grounds asserted in AW’s letter to SH dated 4 June 2014.  The assertions were not made by the Applicant and were not made under oath.  There is simply no evidence of the grounds relied upon by the Applicant.  In any event, those grounds do not appear to have much substance.

27.  Mr Wang argued that he only received Mr Nip’s submission on Monday, 7 July 2014 and he could not file an affirmation in reply for the hearing on 10 July 2014.  He argued that the Applicant suffered prejudice in not being able to respond.  That is beside the point.  The issues are whether the Applicant can show special circumstances and good cause.  That has nothing to do with the assertions contained in the Respondent’s affirmation in opposition.  What the Respondent said in its affirmation was to rebut the Applicant’s assertions in his affirmation, which given the lack of substance was quite unnecessary.  I took no account of and gave no consideration whatever to the Respondent’s affirmation.  The focus of this application is on the two issues of whether the Applicant can show special circumstances and good cause.

28.  Then in his reply submission, Mr Wang raised new grounds for setting aside the statutory demand.  He said that the statutory demand was defective in that the amount of debt stated in the demand as pointed out by Mr Nip was overstated; that the debt was secured; and that there was arbitration going on in relation to the debt.  Despite Mr Nip’s objection that this was evidence raised from the bar table and unsupported by any affirmation, I was prepared, in the interest of justice, to consider those grounds.  I invited Mr Wang to refer me to evidence of such irregularities, security and arbitration in the three centimetre thick loan agreements, guarantees and other documents exhibited by the Applicant in his affirmation.  But he declined.

29.  Mr Wang insisted that the statutory demand was irregular in that the amount of debt was admittedly overstated.  He queried why Mr Nip was allowed to adduce such evidence of overstatement at the bar table without having to file any affirmation but he was not as regards the irregularities in the statutory demand. The amount overstated was about RMB 1.5 million out of a total debt of RMB 30 million.  It was insignificant.  Besides, there are strong authorities to the effect that a statutory demand which merely overstates the amount of the debt, is not by itself and without more, a ground for setting aside a statutory demand: see Re a Debtor (No 1 of 1987) [4]; Brillouet v Hachette Magazine Ltd, Re a Debtor (No 27 of 1990)[5]; Winterthur Life Insurance Company v Au Oi Fong Susana[6]; and Re Kwok Chok Yee[7]. As for why I accepted Mr Nip’s evidence of the overstatement from the bar table but not Mr Wang’s, the answer is simple. There is evidence of the total amount of debt in the statutory demand, the quantum of which was not disputed by the Applicant.  Mr Nip’s disclosure of the overstatement was an admission against the Respondent’s interest and in the discharge of his duty of full and frank disclosure, not to mention that the admission was not disputed by Mr Wang.    

30.  The Applicant has filed no evidence in support of good cause.   Despite the court’s willingness to accommodate the inadequacies in his affirmation, Mr Wang was unable to refer me to evidence of irregularities in the statutory demand which he asserted.  By the time of the hearing, it was already thirty-four days after the period allowed for making application to set aside, AW has not even prepared a draft affirmation setting out the grounds, let alone a properly signed one.  The Applicant has failed to show any good grounds for extension of time.  It is not necessary for me to find if that failure was the Applicant’s fault or the mistake of his solicitors.  Either way, the Applicant has failed. 

Conclusion

31.  In conclusion, the Applicant has failed to show special circumstances or good cause for extension of time to set aside the statutory demand.  His application is dismissed with costs to the Respondent.